America’s Serial Inflator

Doug French

It’s official: The greatest inflator in history will be nominated for yet another term as chairman of the Federal Reserve. President George W. Bush, in a meeting with financial journalists, said, “I think Alan Greenspan should get another term.”

Evidently the president doesn’t think the American people have experienced enough pain from the ravages of the serial inflation wrought by the Fed Chair.

Greenspan has been on the job since August of 1987, and look what he’s done with the money supply. As measured by M-3—currency in circulation, checking account balances, savings accounts and time deposits such as CDs and money market fund balances held by institutions—the money supply has grown from $3.6 trillion in August of 1987 to $8.6 trillion currently. It’s an increase of $5 trillion, or 238 percent! In his almost 16 years on the job Greenspan has created more money out of thin air than ever had been created in all the years leading up to his appointment. He has accelerated the degradation of the U.S. monetary system to the point that money manager William Fleckenstein can appropriately describe it as on the “confetti standard.”

As Greenspan has cranked up the printing presses, the nation’s economy has suffered torturous booms and busts. And at every turn, Greenspan was there to bail out his big financial-firm friends.

While only on the job a couple months, the Fed chairman cut his teeth with the October 1987 stock market crash. His response: flooding the market with liquidity. In 1995, Wall Street’s bankers were in trouble again as the Mexican Peso was pummeled; Greenspan backed a $50 billion bailout plan. In 1998, hedge fund Long-Term Capital Management (LTCM)—supposedly the smartest guys on Wall Street, with two Nobel Prize winners—hit the ditch. The “Maestro” (as a flattering biography called Greenspan) stepped in again, bailing out the firm. The bailout was necessary to prevent the firm from being sold at a disruptive “fire sale,” said Greenspan, contending an LTCM collapse would have resulted “in severe, widespread, and prolonged disruptions to financial market activity.”

Because of some ancient history as an Ayn Rand devotee, Greenspan is viewed in some quarters as an old-school capitalist who wants businesses to sink or swim on their own merits, competing in an unfettered marketplace. Hardly. Greenspan has instead at every opportunity lent a solicitous hand, creating a moral hazard problem. Economist Jeffrey Tucker explains: “If you are continually willing to protect people from the consequences of their own errors, your benevolence will be factored into the future decisions of the person rescued. In the long run, they will make even more errors.”

After a decade and a half on the job, you would think Greenspan would learn something. But currently the chairman and his governors are in the process of making matters much worse, fighting “deflation.”

In modern economics parlance, deflation is a decline in the prices of goods and services, the reverse of inflation. But there is no deflation. The Consumer Price Index (CPI) is up 3 percent from a year ago. The prices of goods and services are not falling.

In 1913, the year the Federal Reserve came into existence, the CPI stood at 9.9. When Greenspan took over in 1987, the index had grown to 113.6. Now, in 2003, the index stands at 184. With Greenspan’s “careful management” it now takes a $1.62 to buy the same goods that cost a single dollar the year Greenspan took over at the Fed. Put that in your 401K and smoke it.

Alfred Broaddus Jr., president of the Federal Reserve Bank of Richmond, is the latest Fed governor pledging to print money to stamp out “deflation.” On April 15th, Broaddus declared that, “Purchasing long-term Treasury securities, in my view, is probably the most effective way for the Fed to undercut deflation at the zero bound.” What Broaddus means by “zero bound” is a zero percent fed funds rate. In others words, even if the Fed lowers the Fed funds rate to zero, and the economy doesn’t improve, they could still buy long-term Treasury securities with the Fed’s bottomless check book.

Alan Greenspan once advocated the gold standard, a monetary system that kept price levels essentially unchanged for a century. Now he is orchestrating the largest inflation of money in history, and average Americans are feeling the pain.

It is time not only for Mr. Greenspan to retire, but also for the Federal Reserve System to be retired.

Doug French, executive vice president with a Southern Nevada bank, is a policy fellow with the Nevada Policy Research Institute.